InvestKL: The treasure chest
For multinational companies looking to relocate their central treasury departments, the list of potential destinations can seem endless. Finance Director Europe looks at Kuala Lumpur's new range of fiscal incentives for treasury management centres and its potential to attract a fresh wave of international investment, as championed by InvestKL.
The role and importance of the treasury department have changed significantly over the years. Before the 2008 financial crisis, the treasury existed to advise and support the business as it looked to expand. But increased volatility in global markets has made its core functions - financial consolidation, risk exposure and liquidity management - central to the immediate and long-term success of every corporation. Conversations about how to organise and structure the department have increased as a direct corollary. In the past, treasury centres were located in close proximity to a company's corporate headquarters. The idea was simple: finance should be as close as possible to senior decision makers in the rest of the business.
But that approach became gradually less effective, as globetrotting transnational corporations had to deal with different financial and regulatory structures, fund movements and time zones.
Regional treasury centres were established to solve these problems and became increasingly central to the expansion of multinational corporations. But deciding where to place the treasury function isn't easy. The range of available countries can be difficult to navigate, given the subtle differences between them.
Tax and other variables
The main consideration for any treasury centre is a low-tax system. The centre's involvement in finance arrangements between subsidiaries and its activity in currency, credit and derivative markets means tax considerations can make a big
difference to company income. Low rates on inter-company interest streams and royalties, on corporate income collected by the treasury, and on value-added tax and stamp duty can really stack up as a value proposition.
Besides tax, other variables can have a large impact on the success of any treasury department that decides to relocate. What kind of regulatory reporting requirements are demanded? How stable is the country politically? What is the labour market like? How sound is the banking industry?
In response to these questions, Western Europe and the US emerged as the most popular areas for the first wave of treasury relocations: both had highly educated labour forces and well developed financial infrastructures.
These locations remain significant to this day, but other countries, particularly in Asia, are beginning to match them in terms of popularity. Their fast-growing economies, low-tax environments and strong telecommunication networks are extremely attractive for multinationals looking to balance cost and quality.
Malaysia's capital Kuala Lumpur in particular has become an attractive place for international investment since introducing an economic transformation programme (ETP) in 2009. Designed to lift the country from middle to high income status by 2020, the programme involved six different reform initiatives, including:
- international standardisation
- human capital development
- liberalisation of entry
- public service delivery
- fiscal policy.
The plan was widely commended after its first year. Michael Hershman, CEO of Fairfax Group, said: "While the Malaysian ETP just completed its first year in operation, the results are indicative of a positive trend which, if continued, could be a game-changer for the future development of Malaysia."
Other efforts by the government to improve efficiency in its financial markets and lower the overall cost of business were recognised in recent data from the World Economic Forum, which ranked the country 21st out of 42 for global competitiveness.
It did equally well in the 2012 AT Kearney FDI Confidence Index, reaching the top ten for most preferred investment destinations in the world. The Malaysian Government's target is for Kuala Lumpur to be among the top 20 cities in the world for both economic growth and livability by 2020. Both its success and its future projections reflect the work done by the government to liberalise the economy and open it up to trade and foreign direct investment.
Part of the country's plan to attract inward investment involves specifically targeting the treasury departments of multinational corporations. In 2012, the government announced plans in its budget to significantly incentivise any company looking to relocate its treasury management centre to Malaysia. Among the initiatives drawn up were:
- an exemption on stamp duty for loan and service agreements
- special treatment for expatriates working in treasury centres
- a five-year 70% tax exemption on all statutory income accrued by the treasury for its basic qualifying activities (fee income, interest revenue, capital gains on surplus funds and foreign exchange management).
As regards the latter, not all countries offer such an exemption. Despite having a relatively benign tax system, Hong Kong, for example, offers no specific tax concessions for corporate treasury centres.
The government's plan certainly went down well in the business world. Hooi Ching Wong, head of treasury services at JP Morgan in Malaysia, congratulated the country for its seriousness in attracting international companies. "Over the last 18 months, we have seen a strong increase in the number of global and regional companies exploring centralised treasury and shared-service-centre models in Malaysia," he said. "With an excellent, low-cost infrastructure, local expertise in application developments, maintenance and data processing, and a professional, multilingual workforce, Malaysia has emerged as a regional hub for companies seeking to grow their business in Asia-Pacific through improvements in efficiencies, costs and risk management."
Tax considerations may be the central point of interest for multinationals looking to relocate, but the overall context of the country - its non-tax variables - are also important. As the indicators suggest, Malaysia is looking positive on most metrics. The country's macroeconomic figures are good: the economy continues to grow between 6-7% each year despite looming uncertainty in the eurozone. Its financial sector is constantly improving, after the liberalisation of foreign exchange controls, and is backed up by a judicial framework that guarantees that the contracts and obligations of business parties are met. Its workforce is well educated and, perhaps most importantly of all, its political set-up is predictable. Increasing numbers of multinational corporations will be looking to set up treasury management centres in the coming years. Their choice of location is likely to vary, particularly in Asia, where many countries are experiencing impressive levels of economic growth. But those places such as Kuala Lumpur that offer a mixture of tax concessions and wider economic transformation are most likely to capture the market and become the regional treasury hubs of the future.